Sector Investing

[ReturntoSender]

RobBlack.com MarketWrap:

http://www.robblack.com/rb_marketwrap.shtml

There will be no after-market summary today due to scheduling conflicts. Midday stocks were mixed in Friday's session. Blue chips got a boost after economists at Goldman Sachs raised their 2004 GDP forecast from 2.5% to 3.3%. Bonds were lower for a fourth day in five, while the debate on interest rates rages on. An article in Friday's Wall Street Journal said the Fed remains undecided on how deep next week's rate cut should be. But on Thursday, a Washington Post article suggested the central bank was ready to lop off 1/2 point from the overnight fed funds target, which currently stands at 1.25 percent.

Strong Sectors: auto manufacturer, biotech, healthcare suppliers, airline, paper, dept stores, wireless, financial, broker/dealer, hotel, tobacco, banking

Weak Sectors: homebuilder, electronic manufacturing services, construction materials, oil & gas equipment, communications equipment, utilities

Top Stories . . . U.S. Treasuries headed toward their biggest weekly decline since mid-March as investors reassessed signs of an economic rebound to conclude that the Federal Reserve will cut interest rates by only a quarter percentage point.

General Motors said it plans to sell $13 billion of bonds, one of the biggest U.S. bond sales, and will use most of the proceeds to reduce deficits in its pension plans.

PeopleSoft's directors rejected Oracle's increased offer to purchase the business software maker for $6.3 billion, or $19.50 a share.

Halliburton, the world's second-largest provider of oilfield services, said profit this quarter probably will plunge to 2 cents a share because of widening losses at an oil project off the coast of Brazil.

General Electric, the world's largest company by market value, maintained its 2003 profit forecast of $1.55 to $1.70 a share even after orders for plastics and appliances dropped last month.

Verizon Wireless, the largest U.S. mobile-telephone carrier, will begin selling a walkie-talkie phone as early as next month, marking the first challenge to Nextel Communications, said people familiar with the matter.

Rate Cut Gurus. . . John Berry in The Washington Post is suggesting the Fed will cut by 50-basis points on Wednesday, while Greg Ip of The Wall Street Journal leads the front page this morning with an argument for 25-basis points.

Bob Macintash, Chief Economist for Eaton Vance, who argues that no rate reduction would be the best decision. He sees enough signs of recovery for The Central Bank to wait a while. Of 133 economists polled by Bloomberg, 116 expect a rate-cut, with 80 opting for 25-basis points, and 36 holding out for 50.

Wayne Angell, former Fed Vice Chairman is in the 50-basis point camp. He says we are increasing the capacity to produce goods faster than demand for products is rising, thereby eroding pricing power. If the funds rate is not cut to 0.75%, we are not going to get the rate of output that is going to turn this job market around.

Brian Wesbury, economist at Griffin Kubik, says a rate reduction will over-stimulate the economy, and force aggressive Fed tightening next year.

Economist Donald Stalheim worries about the impact on money market mutual funds, which are averaging returns of 0.73%. Signs are pointing to an overly easy monetary policy, with gold prices up, the dollar weak, a steep yield-curve, and rising commodity prices.

Fed Cut Comment . . . It’s hard to see that the Fed has an interest in disappointing expectations. So it is more likely to go ahead with a 50bp rate cut. The Fed will explain the rate cut as “insurance”, implying a low cost and a substantial benefit in the unlikely event of another deflation. The result is extreme -- an overnight interest rate of 0.75% at a time when the economy is growing, the dollar has fallen to a non-deflationary level, unemployment is at 6.1%, and a massive growth-oriented tax cut has been enacted. The cost of interest rate extremes (from 6.5% in January 2001 to a possible 0.75% in June 2003) is substantial in terms of distortions within the economy.

Monetary policy is very powerful. Mistakes can start both inflation (as in the 1970s) and deflation (as in the late 1990s). The central bank can stop these by matching the supply of dollars with the demand for dollars, a step Japan never took with the yen. The 2001 interest rate cuts weren’t as powerful as some had expected because real interest rates were still very high and the dollar’s strength was still causing deflation (see our piece Deflationary Central Banks on October 19, 2001).

In November 2002, the Fed lowered rates another 50 basis points and, more importantly, made it clear that it understood the risks of deflation and had the tools and resolve to stop it. The dollar weakened to a non-deflationary level and real interest rates fell into negative territory. That ended the risk of deflation.

Pension Problems . . . David Bianco, head of valuation and accounting at UBS Investment Research, estimates that the total pension deficit for the S&P 500 reached $239 billion at the end of May -- the highest in history -- versus $212 billion at the end of 2002. Bianco said the deficits have expanded despite strength in the equity markets as "significant" declines in interest rates have raised the value of pension liabilities more than the improvement in asset values. "Pension deficits should still be a serious investor concern, particularly for many industrial, material and consumer discretionary companies," Bianco said. He feels that S&P 500 earnings estimates should be reduced by $2 a share given that "aggressive" long-term pension asset return assumptions are unlikely to be met.

Quotes of Note . . . ``You have two big companies saying things appear to be better, and that the outlook isn't deteriorating,'' said Kurt Brunner, who helps manage $1.3 billion at Swarthmore Group. ``The building blocks (for an improved economy) continue to be put in place. It seems people want to be in stocks now.''

``The background for equities is good,'' said Mark Beale, who helps manage about $500 million of U.S. stocks at New Star Asset Management in London. A possible interest-rate cut by the U.S. Federal Reserve and ``reasonably positive'' economic numbers should be ``a key driver for the equity markets.''

Fund Flow . . . Funds investing primarily in U.S. equities took in $4.8 billion in new money during the week ending Wednesday, estimates Trim Tabs director of research Carl Wittnebert, adding to inflows of $3.2 billion the week before. Bond funds had inflows of $1.8 billion, the mutual fund tracker said, versus last week's inflows of $2.1 billion.

Harry Potter Day . . . The new Harry Potter book, set to go on sale at midnight, is expected to set new records in the book marketing industry. Barnes & Noble, the world's largest bookseller, and Barnes & Noble.com expect the book, published by Scholastic, to break all previous records for first day and first week sales for any book. The retailer predicts the book to sell more than one million copies by the end of its first week on sale. Delivery service FedEx said it will deliver more than 250,000 copies of the book on June 21 to Amazon.com customers, making it the largest single-day, e-commerce delivery event.

Eco Speak . . . Economists at Goldman Sachs say they have become "more optimistic" about the U.S. economic outlook thanks to more accommodative financial conditions over the past months. The brokerage expects the Federal Reserve to slice short-rates by 1/2-point next week and then remain on hold through 2004. Goldman hoisted its 2004 gross domestic product growth projection to 3.3 percent from 2.5 percent. The brokerage said it's also more confident that growth improvements will be sustainable. "What's important here is the shift in the Fed's regime -- to focus on keeping short-term rates low for a sustained period in order to prevent deflation," the firm told clients. Goldman also forecasts "slightly firmer" profit growth and predicts the yield on a 10-year Treasury note will rise to 3.80 percent by year-end, then fall back to 3.40 percent by the end of 2004. Goldman added that the economy is likely to "downshift to a slower growth pace" in the second half of 2004 as the stimulus from tax cuts subside.

The U.S. economy is poised to recover, but it won't be spectacular, the Economic Cycle Research Institute reported Friday. The ECRI's weekly leading index rose from 5.5 percent to 6.1 percent growth in the latest week, the highest rate since July 1999. "It's not bad," said Lakshman Achuthan, managing director of the research group. "But I would not conclude that we are about to experience a very strong rebound." Achuthan said pockets of weakness persist, especially in the manufacturing sector. "It's going to feel like 2002," he said. The ECRI index has a good track record of forecasting turning points in the economy over the past 50 years.

Financials . . . Merrill Lynch initiated Ameritrade and E-Trade with "buy" ratings. Amerirtade added 2.3 percent and E-Trade rose 2.2 percent. Merrill also reinstated coverage of Charles Schwab with a "neutral" rating.

Merrill Lynch said it's initiating ETrade with a "buy" rating and a price target of $11.50 per share. Merrill said the company is "the farthest along of the online brokers in developing an integrated financial services platform, rapidly diversifying revenues into retail banking and mortgages." Diversification has allowed the company to deliver relatively stable earnings, with bank revenue up 36 percent year-over-year in the first quarter of 2003, offset by a 21 percent decline in brokerage revenue, Merrill said. Although ETrade stock is up 113 percent since early March, its valuation "remains much lower than its peers," Merrill said.

General Electric reiterated its second quarter earnings target of 37-39 cents per share. In an analyst meeting, CFO Keith Sherin said GE's 2003 EPS target is $1.55 per share to $1.70 per share. It'll tighten its total year outlook at its second-quarter conference call with analysts. The move comes after some Wall Street analyst trimmed their full-year profit outlook for GE on a sluggish global markets and weak results at GE's plastics division. GE said its NBC unit had a "great" up front ad selling season, and that service and technology units are strong, but it's seeing slow economic growth. There will be an impact from SARs, but it's now diminishing, GE said. GE said it confirmed it reached a tentative labor agreement on Jun 15 with various unions. Ratification votes are on June 23 and GE is "optimistic."

Lehman Brothers was downgraded at Bernstein to Market Perform from Outperform following yesterday's results, saying they believe the high water mark for fixed income revs this year will have occurred in 1st quarter-2nd quarter. The firm expects 3rd quarter-4th quarter revenue to have a lower contribution from fixed income as an ever-smaller number of fixed income sectors continue to rally. Target is $80.

Golden West's loan portfolio continued to grow at roughly the same rate as the market in April (11.7% annualized rate). Year to date, it has grown slightly faster (12.8% annualized rate). Most of the company's originations (91% in May) continue to be adjustable rate mortgages, loans that Golden West is prepared to hold regardless of interest rate trends. In May, the net interest spread declined slightly (2.94% vs. 3.01% in April). Still, the margin will compress less than we originally expected this year given current monetary policy. Credit quality remains stable. NPAs were 63 bps, consistent with the 62 to 65 bps they have averaged for the last nine months. Deposit growth (1.1%) picked up again in May, after slowing in April (tax season). Year to date deposit balances have grown by $3.04 billion, nearly sufficient to fund all of the company's $3.4 billion of loan growth.

Oil & Gas . . . Halliburton expects to record additional losses in the second quarter due to higher estimated costs and schedule extensions for its Barracuda-Caratinga project. Halliburton now expects to earn at least two cents in the second quarter.

Halliburton said the cash required to fund the settlement on asbestos claims may "modestly exceed" previous forecasts of $2.78 billion, due to an increase in the estimated number of claims. If it does exceed expectations, the oil services company said it would seek to adjust the settlement to reduce the overall amount per claim, or increase the amount it would be willing to pay to resolve the claims. Separately, the company said it would take an additional operating loss of $104 million, or 24 cents a share on its Barracuda-Caratinga project due primarily to higher costs and schedule extensions.

Marathon Oil & Kinder Morgan dissolve MKM Partners L.P.,which has oil and gas production operations in the Permian Basin of Texas. Marathon holds an 85 percent equity interest in the MKM partnership.

Valero Energy warned that second quarter earnings would fall short of expectations due to higher natural gas prices, unplanned outages at some refineries, lower sour crude discounts and declines in distillate margins. The refinery operator now expects to earn $1 to $1.10 a share in quarter ending June, below the average analyst forecast of $1.58 a share.

Halliburton addressed asbestos claims & Barracuda-Caratinga project. The firm announced additional operating losses on Barracuda-Caratinga project of approx $104 mln or $0.24 per share after tax. The additional charges follow a thorough review of the project indicating higher cost estimates, schedule extensions and other factors. The firm sees diluted EPS from continuing operations of at least $0.02 in 2nd quarter. In addition, Co. has continued to conduct due diligence on current asbestos claims. Documentation continues to improve and supports previously proposed settlement. However, as a result of an increase in the estimated number of claims, the cash required to fund the settlement may exceed previously announced $2.775 billion. If it does, the company would either adjust settlement matrices to reduce overall amounts per claim, or increase the amount it would be willing to pay to resolve its asbestos and silica claims.

Energy . . . PG&E's, along with its bankrupt utility unit Pacific Gas & Electric and the California Public Utilities Commission reached a tenative settlement agreement related to the utility's Ch. 11 bankruptcy. If approved, PG&E said the deal would allow the utility to emerge from bankruptcy intact, as an investment grade utility and to pay all valid creditor claims without raising customer rates.

Semco Energy dropped its annual dividend to 30 cents per share from 50 cents, and lowered its earnings outlook to reflect higher than anticipated financing costs and weak results from its construction services business. The company now sees a profit before items of 30 to 35 cents per share in 2003, down from its prior projection for earnings of 55 to 60 cents per share.

Transports . . . Fitch Ratings said its "BBB+" rating on General Motors already incorporates the automaker's plan to offer $10 billion in debt and convertible debentures to fund its pension plan. The debt rating agency said that pre-funding of near-term requirements "crystallizes these liabilities" into obligations with fixed terms and carrying costs, but added that it does extend the maturities. The firm said the issuance "could provide a buffer against further deterioration in the economic environment or in the company's operating performance."

Jetblue Airways was downgraded at Raymond James to Outperform from Strong Buy based on valuation, as the stock is nearing their former target of $41.

Deutsche Securities says they remain bullish on the growth prospects of the regional airlines, since the majors continue to highlight the use of regional jets as an important part of their financial recovery. Based on 15x their 2004 ests, firm believes Sky West should trade to $23 and Atlantic Coast Airlines should trade to $18. The firm favors SKYW since the co has already reached a new agreement with United, so their growth for 2004 is more certain, and the company doesn't have any outstanding labor contracts as they are non-union.

Michael Bruynesteyn at Prudential upgraded General Motors to "buy" from "sell," and raise his price target on the stock to $45 from $29 on the belief that an eventual economic recovery will overcome short-term negative news. Bruynesteyn said he was looking past 2004 and into 2005, when earnings should top $6 a share, and concerns over its pension and benefit plans, pricing and volume should stabilize. The firm thinks the $2 dividend is likely safe in the medium-term, providing a downside cushion for the shares. Separately, the automaker had announced that it would offer $10 billion in debt and convertible securities to fund its pension plan.

FedEx reported 4th quarter earnings before the market opens on June 24. Expect an inline quarter characterized by (1) continued double-digit y-o-y volume growth in Ground; (2) strong International Priority volumes; and (3) gains from fuel surcharges and currency, offset by weakening LTL results and continued weakness in core domestic Express volumes and margins. 4th quarter is likely to be an anticlimactic quarter because the company has already provided 2004 guidance and initial comments on the Express restructuring. Suspect investors will instead be focused on forward-looking comments regarding the restructuring, 2004 pension, the direction of ground volumes, and general economic conditions. Potential downside in the quarter could result if further weakness surfaces in core overnight air express volumes or LTL pricing and tonnage. Express and Freight have one less working day year-over-year in 4th quarter, making it incrementally more difficult for FDX to substantially upside our margin assumptions. This note details our expectations by product, as well as a list of ten items for investors to focus on in the 4th qurter report. Expect FDX mgmt to provide greater details on its recently announced domestic headcount reductions and 2004 pension assumptions. While additional restructuring announcements could drive the stock, expect few new specifics to emerge on the call.

Food & Beverage . . . Business Week reporting that although the performance of the ketchup king Heinz has been lackluster over the past few years there are a few pros who think the co might be an appetizing takeover bait. One hedge-fund manager interviewed says Neste might be salivating. One analyst who runs his own research firm is set to recommend Heinz on takeover expectations. He figures the stock is worth $50 in a buyout. Heinz could regain its growth status under aggressive management. The shares which hit $60 in 1999, now go for $34.

Office Equipment . . . Xerox Corp sets pricing on the issuance of new common stock, mandatory convertible preferred stock and senior unsecured notes. The company also said that it finalized the terms of a new revolving credit facility. The offering includes approx 40 mln shares of common stock at $10.25.

Retail . . . CarMax reported fiscal first-quarter net earnings of $35.3 million, or 34 cents a share, up from 28 cents a share in the year-earlier period. Revenue for the quarter ending May rose 17 percent to $1.17 billion. The results were in line with the average analyst forecast. The used car retailer said gross margin dollars per used unit achieved targets, and used unit comparable-sales growth was above forecasts. Looking ahead, the company expects to earn 33 to 35 cents a share, versus analyst forecasts of 33 cents.

Bed, Bath & Beyond announced on Thursday, June 19 the approximately $200 million all cash acquisition of Christmas Tree Shops, a privately-held retailer of giftware and household items. It is very important to understand that this is not a Christmas-only business. Analysts are maintaining 2nd quarter 2003 EPS estimate of $0.30 vs. $0.25 last year. Analysts are raising 2003 EPS estimate $0.02 to $1.23 due to the addition of the profitable sales of the newly acquired business. Analysts are raising 2004 EPS estimate $0.05 to $1.50. Analysts view this transaction positively, as it adds to top line growth and is accretive to EPS by $0.02 in 2003. Moreover, the concept has the potential to be a nationwide chain, as it has a valuepriced merchandise offering of seasonal and party goods, gourmet food, glassware, dinnerware, and decorative items and an intensely loyal customer base.

Restaurants . . . Starbucks said overnight that while it is "mindful of the financial cycles in the global marketplace, they have not had significant impact on Starbucks overall business." The coffee retailer said it's committed to plans to open at least 15,000 stores in international markets. It said it's nearing profitability in the near-term in the U.K. market.

Yum Brands reported Period 6 (final period of 2nd quarter) sales that were mixed but overall better than we expected. International sales were surprisingly good with local currency system sales up 6% and dollar sales up 13%, a sequential improvement. Domestic company blended same store sales were flat against a difficult plus 5%, with Taco Bell up 5%, Pizza Hut up 2% and despite a down 8% performance at KFC. Period 6 sales raise our confidence in our 2nd quarter and full year estimates. Taco Bell's performance against a plus 8% last year is especially encouraging because part of the long term thesis on YUM is that greater operational focus should lead to more consistent sales performance and Taco Bell, in our view, was the first of the brands to step up its operational focus. Pizza Hut enjoyed stronger sales than we expected aided by the reintroduction of the P'Zone which boosted the Red Roof business. KFC remains the problem area at Yum; more extensive menu and brand work is planned for this brand. Yum picks up international results on a lagged basis and we had anticipated softer (up 3% local currency) sales as more of the SARS effect in China was reflected in the numbers. The peak SARS effect in China should be reflected in Period 7 results, but we are encouraged by the period 6 performance.

Darden Restaurants was cut to Underperform at Smith Barney following last night's earnings report, saying the magnitude of their concerns regarding poor sales at Bahama Breeze and various cost pressures such as insurance has deepened. The firm says company's goal of 8-12% EPS growth in 2004 looks even worse once one realizes the target incorporates the earnings boost from 2004's extra 53rd week. The firm cuts target to $18 from $22.

Darden reported 4th quarter & full year EPS a penny better than estimates of $0.34 and $1.30, respectively, despite softer than expected May sales. The company repurchased 5.8 million shares in the 4th quarter and a lower than expected tax rate added $0.01 to EPS. Darden guided EPS growth for fiscal 2004 of 8%-12% or $1.41-$1.47, advising that the $0.05-$0.06 per share

boost to FY 2004 EPS from a 53rd week would be reinvested in the business. Same store sales are forecasted to grow 1%-3%. Analsts are reducing 2004 EPS estimate from $1.48 to $1.45. Analysts had expected a $0.05 boost to EPS from the extra week. The company maintained more aggressive long term EPS growth targets, stating that in a normalized economic environment long term EPS growth should be at least 15%. This seems aggressive given a modest unit expansion rate of 4%-5%. Darden ended the year on a soft note with May same store sales flat at Olive Garden and down 2%-3% at Red Lobster. 4th quarter same store sales were up 0.1% at Olive Garden and up 0.9% at Red Lobster. Full year same store sales growth was up 2.2% at Olive Garden and 2.7% at Red Lobster.

Apparel . . . Nautica (has withdrawn one of its nominees for election to Nautica's board. Barington, which has complained about the company's direction, still has two nominees for the board. Nautica said the withdrawal "only confirms the company's view that the Barington Group's intentions are not in the best interests of all stockholders." Nautica added, however, that it remains open to exploring opportunities to enhance shareholder value, and that it's in talks with regards to the possible sale of the company.

Heathcare . . . WebMD disclosed plans to sell $300 million in convertible subordinated notes due 2023. The healthcare information services plans to use the proceeds of the deal, which includes a $15 million overallotment option, for general corporate purposes.

Express Scripts disclosed it had been subpoenaed by New York's attorney general. The subpoena seeks information about "the company's compliance with certain state and federal antitrust and consumer protection statutes." Express said it believes its practices comply with the law.

OraSure Tech was upgraded at UBS Warburg to Buy from Neutral. The firm is saying their discussions with the CDC indicates that it is likely that OSUR will receive an order for their OraQuick rapid HIV test for about $2 million, and firm believes there is potential for further government-related orders in 2004, which could have a more significant impact on numbers. The firm raises target to $9 from $6.

Wachovia initiated coverage of the managed care industry with a positive bias. The firm initiated Aetna and Coventry Health with Outperform ratings based on their belief that they have the highest probability of meaningful EPS upside as well as valuations that are especially attractive. The firm initiatesd Anthem, Humana, Mid Atlantic, United Health and Well Point with Market Perform ratings based on valuation; and initiates Cigna and Oxford Health with Underperform ratings, as they see EPS growth problems for both company's.

Drugs . . . King Pharmaceuticals received approval from the U.S. Food and Drug Administration for a supplemental New Drug Application covering pediatric and adult formulations of the Company's nerve gas antidote AtroPen. King said the antidote uses auto-injector technology stemming from king's the January 2003 acquisition of Meridian Medical Technologies.

Biotech . . . Amgen and its partner Wyeth announced yesterday results from a second Phase III Enbrel trial in psoriasis at the International Psoriasis Symposium. Results from the study were consistent with the results from the Phase III trial that was presented at the recent AAD meeting. We expect that Amgen could submit the data to the FDA in 3rd quarter 2003 with an approval in 1st half 2004. Additional data was presented at EULAR which included results from a Phase III Enbrel trial in ankylosing spondylitis (currently under review by the FDA) and once weekly use of Enbrel in RA at 50mg (the currently approved dose is 25 mg twice weekly). The timing and outcome of these trials are in line with expectations. Amgen submitted data for a label extension to include ankylosing spondylitis on January 22, 2003 and expect a regulatory response in 2nd half 2003. The FDA is also reviewing a label extension to include once-weekly dosing in RA. Such a label expansion will enable Amgen/Wyeth to position Enbrel to be even more competitive from a convenience standpoint relative to recent biologic entrants to the market such as Abbott’s Humira. Humira is also administered as a SC injection but is given once every two weeks.

Genentech PDUFA date for Xolair is today for moderate to severe allergic asthma. Genentech and partners TNOX/NVS are expected to receive a full approval. Also PDLI is set to receive a 3% royalty on the projected $500 mln worldwide sales. Of note, the FDA panel unanimously backed Xolair on May 15.

Media . . . CIBC believes that Fox Entertainment is again on track to beat street estimates for 6th straight Quarter, despite the Auto-led meltdown in Spot. Firm is raising its 4th quarter est to $0.27 from $0.26, or 4 cents above consensus.

SG Cowen believes that near-term pluses are priced into XM Satelliteite, but that 2nd-half should offer more upside. Specifically, believes stock has priced in expected 2nd quarter outperformance, but subscriber accelerations in 2nd half could trigger a further rally later this year. Firm's DCF valuation suggests a $15 share price.

Telecom . . . Arindam Basu at Morgan Stanley downgraded Research in Motion to "underweight" from "equal weight," due primarily to valuation. Basu feels the stock is now "priced for perfection" following the sharp run up since the company's analyst meeting in early May.

Research In Motion downgraded at Morgan Stanley based on valuation, as the stock has rallied 35% since the co's May 5 analyst day and firm believes it is priced for perfection.

Nextel target raised to $22 at Friedman Billings.

Consumer Electronics . . . Palm earnings could be at high end of guidance. Owing to good initial acceptance of Palm's newest consumer product, Zire 71, as well as modest expectations for the quarter, Palm could report in-line results toward the high end of the guidance. The major issue for investors is assessing the value of the two divisions – Palm Solutions (hardware) and PalmSource (software) – in front of the spin-off.

EMS . . . Solectron, one of the largest contract manufacturers of printed circuit boards and other computer innards, reported a $3.1 billion quarterly loss. Variance/Analysis (Sales & Earnings) Strength in Consumer (up 124% Quarter/Quarter) and Semi-Test (up 43% Quarter/Quarter) due to new outsourcing programs caused revenue to be $112M above consensus and above the midpoint of management's guidance range. EPS was $0.07 less than estimate and consensus due to lower than expected gross margins ($0.04 impact) and an unexpected deferred tax asset allowance in the quarter. Both Inventory (-6%) and A/R (-2%) were down in the quarter. Flat sales combined with the inventory and A/R decline caused DSOs to decrease 3 days and turns to tick up to 6.6x from 6.1x. This resulted in CCC declining 5 days to 61. CFO was $72 million and capex was $35 million producing FCF of $38 million. Cash declined $442 million, due primarily to the $514M in required LYON debt payment in the qtr offset with FCF generation. The company faced a wave of analyst stock downgrades after reporting that it lost more money than it recorded in sales during the period. The contract manufacturer is now out of compliance with an untapped credit facility and is talking to bankers about how to amend it.

Semiconductor Equipment . . . Mark Fitzgerald at Banc of America suspects that the recent run up in the stock prices of semiconductor equipment makers "is not sustainable" without a sharp turn in fundamentals. He thinks most companies will meet earnings and revenue forecasts, but believes third-quarter order growth will be only 2 percent, versus consensus expectations of 10 to 15 percent growth. "We think the recovery will be a series of disappointments where investors' expectations will need to be ratcheted back," Fitzgerald said in a note to clients. Among chip equipment makers, Applied Materials, KLA-Tencor and Novellus Systems.

Semiconductors . . . LSI Logic seen as likely SAS silicon partner for Hewlett-Packard. RBC Capital Mkts believes that the Industry Standard Server group within Hewlett-Packard is close to selecting a silicon partner for its initial SAS strategy. The firm believes that HP is likely to select LSI over Adaptec for this program.

Business Week wrote about the little-known RF Monolithics, a maker of radio parts, could become a highflier. RF supplies filters and transceivers to Sirius Satellite Radio, helping listeners tune in to stations anywhere in the U.S. via satellite. Products are also being designed for XM Satellite Radio, which may have 1.2 mln subscribers in 2004. Casey Stern of investment boutique Fagenson, which bought the stock at 2 in mid-March thinks it could hit $10 in a year.

Cypress Semi restated quarterly results in a 10-Q/A filing, the company revises quarterly results to reflect an error in the extraction of data related to the number of stock options utilized to arrive at the deduction for stock-based employee compensation expense. The correct pro forma loss per share is $0.33 and $0.56 for the three month periods ended March 30, 2003 and March 29, 2002 (vs previously reported losses of $0.28 and $0.35).

Morgan Stanley maintains Underweight on PMC-Sierra. Although they believe the co is well-positioned and the telecom industry fundamentals appear to have at least stabilized, they are uncomfortable with the aggressive expectations that are driving the stock's premium valuation.

Boxmakers . . . Although Apple historically has used its developers conference for software announcements, this year could be different since Apple is not participating in Macworld this summer: the prevailing wisdom is that Apple could preview its next-generation platform based on the long-awaited G5 chip. Expect to see "Panther," the next version of OS X.

Software . . . Ryshawy at BNP Paribas downgraded SAP to "underperform" relative to Europe, citing evidence that the U.S. recovery remains "modest," with customers still reluctant to commit to major software investments. In additions, Ryshawy doesn't feel the positive impact from Oracle's hostile takeover bid for PeopleSoft will be enough to offset weakness in Europe.

First Albany initiated FileNet with a "buy" rating and set a price target of $23. Earlier in the session, the shares reached a 52-week high of $19.30. The firm believes that enterprise content management, FileNet's forte, is becoming a "top-spending priority" for companies, and that the company has a "highly leverageable financial model" and "a compelling valuation."

Merrill Lynch dropped Business Objects to 'neutral' from 'buy.' The firm cited recent price appreciation, lack of a near-term catalyst, and a heightened competitive landscape for the downgrade.

Roxio said it has completed a private placement of 4 million shares of its common stock for $5.50 each. The deal yielded gross proceeds of $22 million, which Roxio plans to add to its working capital.

SAP is on track to continue to gain market share over the medium term. However, with absolute growth still elusive, majority exposure to the weak European market and significant execution risk in 2nd half, following easy 2nd quarter comps, the current valuation is stretched c/f our €92 fair value estimate. Freeing Up IT Budgets For Innovation. The TCO/ROI story was as apparent in Orlando as it has been at other recent conferences. SAP conceded that IT budgets are likely to remain pressurised for some time and laid out proposals for companies to use SAP products to reduce the TCO of their IT infrastructures in order to free up some IT budget ... to spend on more SAP products in pusuit of growth. Although there was little evidence to suggest that improved customer interest has translated into deals actually being closed, the tone from SAP, as well as integrators and customers, suggested an improvement in business conditions in the US market, consistent with our findings at our own tech conference last week. Product Break-Outs More Updating Than Revelationary. SAP updated us on progress on its SMB, software verticalisation and enterprise services architecture strategies, as well as formally unveiling CRM 4.0. Although

there was little fundamentally new, SAP showed that it is making good progress in each of the strategies outlined over the past twelve months or so. SAP became more vocal about its position on the ORCL/PSFT/JDEC triangle during the conference. Very unlikely to get involved in any similarly large M&A activity, SAP is aiming to offer its competitors' installed customers a stable alternative. However, even assuming that the uncertainty lasts, SAP only hopes to see a positive impact on its own business towards year-end.

B. Riley downgraded Roxio to Sell from Neutral. The firm believes the company's private placement provides further indication that ROXI is facing a major dilemma with its declining software business and aggressive spending plans to build the online music distribution biz, which is burning cash. The firm firm is especially concerned about mgmt's lack of attention to shareholder value. Target is $3.50.

Smith Barney initiated the software industry with a Market-Weight rating, saying current valuations leave little room for upside as earnings growth resumes. The firm initiated coverage of BEA Systems and Quest Software with an Outperform; Mercury Interactive and Veritas with an In-Line; and BMC Software, Siebel, and Symantec with an Underperform.